Credit Card Delinquency Wave Reaching "Tidal Force" (U.S. Consumer Tapped)

Discussion in 'Economics' started by ByLoSellHi, Aug 19, 2009.

  1. Credit Card Delinquency Wave Reaching Tidal Force
    August 19, 2009

    The American consumer in ICU, headed for critical care, just like the economy as a whole...

    This is a story that has been brewing for a while and we've tried to cover it when we're not tracking hedge fund portfolios. So far in 2009, the data surrounding credit card charge offs and mortgage delinquencies has not been pretty... at all. Just now after the close of the second quarter, we see that both metrics have hit the highest rates since the Federal Reserve began tracking them.

    Credit card delinquencies (payments more than 30 days late) rose to 6.7% up from 6.68%. Charge-offs (listed as 'uncollectable' by the banks) rose to 9.55%, up from 7.64%. The scary thing here is that this trend is accelerating (as illustrated by the graph below, courtesy of


    An acceleration in charge-offs and delinquencies obviously means bad things for financial institutions and the economy in general. Much like the impending (and already current) problems in commercial real estate, we've likened credit card charge-offs as a 'second wave' in this economic crisis. The first tidal wave came through and washed out a whole lot in the economy. As people begin to lose work and fall behind on their massive debt repayments, they drown. This creates a second wave of writedowns for financial institutions and another set of problems for an economy trying desperately to recover. The initial tidal wave hits and knocks America down. Then, when America starts to get enough strength to stand up, they will be washed away again with a whole new slew of problems.

    This is due to the delayed effect the first wave had on the consumer. After people are laid off, they scramble to find new jobs and dwindle what little savings they have left. (Remember, America's savings rate has not been the best and we've concluded that it needs to rise in order to help get out of this mess). And, the fact that the unemployment rate keeps rising is not helping things either. Once their savings is gone, they rely on credit cards as a flotation device. And, this scenario is only the people who don't already have credit card debt. Those already suffering under this burden begin to bear an even heavier load until they simply can't make payments at all.

    This effectual lag has slowly but steadily been building for months and the latest charge-off and delinquency data has begun to spike. In fact, we started posting about rising delinquencies back in August of 2008 when we saw delinquency rates starting to near 5%. We then touched on the impending credit card squeeze back in November as well, as we began to look at things in-depth. Nowadays, charge-offs are nearing 7% and in the span of one year we've seen a surge in credit card delinquencies of almost 2%. This just begins to show the lagging effect this phenomenon will have.

    So, this is nothing new. Charge-offs and delinquencies are accelerating and even the CEO of JPMorgan (JPM) Jamie Dimon himself says that consumer loans and credit cards will be a house of pain for financial institutions. Well, he should know since his firm is in the eye of the rising storm. As such, we penned a piece announcing our downgrade of the American consumer's credit rating where we examined the potential impact of credit line reductions.

    The main thing to take away here is that credit card charge-offs and delinquencies are getting pretty bad and have the potential to go to 'worse.' The lagging effect of these charge-offs and delinquencies cannot be overstated as these problems slowly fester. Too many consumers have been struggling and now find themselves caught in the undertow; the wave has been building for some time now. The only questions now are how big will it get and when will it crash down?
  2. Haven't AMEX and Discover said that deliquencies and charge-offs are improving? After all, Cramer says so, and he's always right.
  3. i doubt it. in england (so it may be different in america) i don't think there is a person who doesn't owe 20-30k on credit cards.
  4. The U.K. has the most indebted consumers in the world, and the U.S. is a proud number 2, close behind.
  5. Market obviously finds this bullish! Buy!
  6. logikos


    What a shame, but I can't say too much because I have my share of debt.

    I had a conversation with my aged mother yesterday and she was reminiscing about the "good old days" where they had to save for and purchase every appliance and piece of furniture one item at a time. Layaway plans were very popular. The only debt they had was a home loan, and back then it was a whopping 4K

    Last home I sold, a young couple in their mid-20s bought the house, a big house they planned to fill with kids. They had very little possessions, so I'm sure they took out another loan to fill it with furniture.

  7. If VISA or MC goes belly up... do their networks get disrupted? That could have a far deeper effect than banks going under, since a pretty big chunk of world commerce these days goes through those networks... (debit and credit cards...)
  8. Too big to fail.:)
  9. Neither owns the $$$ being exchanged.

    Issuing banks own the debt/loan.

    Visa and MC simply make a % of the amount "charged" as a processing fee. If the consumer defaults, they could care less, as they made their money at the point of sale.
  10. Well yeah, but don't they function on a manner similar to clearing houses... so that if too many banks don't pay they end up taking risk?
    #10     Aug 19, 2009